Oct. 7 (Bloomberg) -- Individual investors should be wary of buying stocks now because most Standard & Poor’s 500 Index companies are trading above their average prices for the past 50 days, signaling a short-term retreat, according to Bespoke Investment Group LLC.
The proportion of stocks in the benchmark index above their 50-day average has reached 91 percent, a sign that stocks may retreat from “overbought levels” before resuming their rally, Justin Walters, Bespoke’s co-founder, said yesterday.
When half of all stocks are above their 50-day moving average, it indicates a healthy market to technical analysts, according to Walters. Of the 10 industries in the S&P 500, only financial companies are below their 50-day average after the benchmark index climbed 8.8 percent last month for its best September gain since 1939.
“A reading this high can precede a short-term pullback,” Walters said in an interview. “There’s a lot of momentum behind this rally, but it’s something to take caution of. It doesn’t mean we’re due for imminent decline, but it’s risky to be buying here in the short term. It’s not a glaring ‘sell’ signal, and it’s not a glaring ‘buy’ signal.”
The 90 percent threshold wasn’t eclipsed from 2006 to 2008. In the four instances since March 2009, the S&P 500 fell twice and climbed twice in the subsequent week, according to Bespoke.
Based on past performance, the indicator may be signaling a resumption of the rally, once companies start providing earnings forecasts, Walters said.
The S&P surged in three of the four three-month periods following “overbought” signals, Bespoke data showed. The exception was in April, when the S&P started a 14 percent plunge over the next three months, partially a result of the 20-minute market crash on May 6 that erased $862 billion from the value of U.S. shares.
The S&P 500 fell 0.1 percent to 1,159.97 yesterday.
All 10 industry groups in the S&P 500 and all 30 stocks in the Dow Jones Industrial Average advanced last month as investors gained confidence that the world’s largest economy will evade a double-dip recession and speculated that the Federal Reserve will buy more debt to support the recovery.
In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.
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